Ngân hàng, tín dụng - Chapter 12: Depository financial institutions

1Copyright © 2009 Pearson Addison-Wesley. All rights reserved. Chapter 12 Depository Financial Institutions Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 12-2 Learning Objectives • Evaluate the traditional uses and sources of bank funds • Understand bank profitability and the risks inherent in banking • Describe the recent consolidation in the banking industry and the expansion of banks into nontraditional banking markets • Put international banking into perspective • Understand and analyze the subprime mortgage crisis Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 12-3 The Fundamentals of Bank Management • Banks are business firms that buy (borrow) and sell (lend) money to make a profit • Money is the raw material for banks— Repackagers of money • Financial claims on both sides of balance sheet – Liabilities—Sources of funds – Assets—Uses of funds 2Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 12-4 The Fundamentals of Bank Management (Cont.) • Uses of Funds (Assets) (Table 12.1 and 12.2) – Total loans increased from 54% of total assets in 1980 to 59% in 2007—most increase coming from mortgages – Decline in cash and investments in state and local government securities – Holdings of federal government securities is fairly constant— highly marketable and liquid • Counter-cyclical—increase during recessions and decrease during expansions • Banks treat federal securities as a residual use of funds Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 12-5 TABLE 12.1 Assets of Insured Commercial Banks, 1980–2007 (billions of dollars) Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 12-6 TABLE 12.2 Assets of Insured Commercial Banks, 1980–2007 (percentage distribution) 3Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 12-7 The Fundamentals of Bank Management (Cont.) • Uses of Funds (Assets) (Table 12.1 and 12.2) (Cont.) – Banks are barred by law from owning stocks—too risky – However, banks do buy stocks for trusts they manage—not shown among bank’s own assets Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 12-8 The Fundamentals of Bank Management (Cont.) • Sources of Bank Funds (Liabilities) (Table 12.3 and 12.4) – Percentage of funds from transactions deposits has reduced from 23% in 1970 to 6% in 2007 • Used to be major source of funds • Generally low interest (if any) paid on demand deposits and increase in interest paid on other types of assets has caused this decline Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 12-9 TABLE 12.3 Liabilities and Capital of Insured Commercial Banks, 1980–2007 (billions of dollars) 4Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 12-10 TABLE 12.4 Liabilities and Capital of Insured Commercial Banks, 1980–2007 (percentage distribution) Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 12-11 The Fundamentals of Bank Management (Cont.) • Sources of Bank Funds (Liabilities) (Table 12.3 and 12.4) (Cont.) – Non-transaction deposits represented 46% of banks’ funds in 2007 • Passbook savings deposits—traditional form of savings • Time deposits—certificates of deposit with scheduled maturity date with penalty for early withdrawal • Money market deposit accounts—pay money market rates and offer limited checking functions • Negotiable CDs—can be sold prior to maturity Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 12-12 The Fundamentals of Bank Management (Cont.) • Sources of Bank Funds (Liabilities) (Table 12.3 and 12.4) (Cont.) – Miscellaneous Liabilities have experienced a significant increase during past 30 years • Borrowing from Federal Reserve—discount borrowing • Borrowing in the federal funds market—unsecured loans between banks, often on an overnight basis • Borrowing by banks from their foreign branches, parent corporation, and their subsidiaries and affiliates • Repurchase Agreements—sell government securities with agreement to re-purchase at later date – Securitization—Pooling loans into securities and selling to raise new funds 5Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 12-13 The Fundamentals of Bank Management (Cont.) • Bank Capital (Equity) – Individuals purchase stock in bank – Bank pays dividends to stockholders – Serves as a buffer against risk – Equity capital has remained stable at 6%-8%, but riskiness of bank assets has increased – Bank regulators force banks to increase their capital position to compensate for the increased risk of assets (loans) – Equity is most expensive source of funds so bankers prefer to minimize the use of equity Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 12-14 The Fundamentals of Bank Management (Cont.) • Bank Profitability (Table 12.5) – Bank management must balance between liquidity and profitability – Net Interest Income • Difference between total interest income (interest on loans and interest on securities and investments) and interest expense (amount paid to lenders) • Closely analogous to a manufacturing company’s gross profit Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 12-15 TABLE 12.5 Income Statement of Insured Commercial Banks, 1980–2007 (billions of dollars) 6Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 12-16 The Fundamentals of Bank Management (Cont.) • Bank Profitability (Table 12.5) (Cont.) – Net Interest Income (Cont.) • Net interest margin—net interest income as a percentage of total bank assets • Factors that determine bank’s interest margin – Better service means higher rates on loans and lower interest on deposits – Might have some monopoly power, but this is becoming more unlikely due to enormous competition from other banks and nonbank competitors – Also affected by a bank’s risk—interest rate and credit Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 12-17 The Fundamentals of Bank Management (Cont.) • Bank Profitability (Table 12.5) (Cont.) – Service charges and fees and other operating income • Additional source of revenue • Become more important as banks have shifted from traditional interest income to more nontraditional sources on income – Salaries and wages • Banks are very labor-intensive • Pressure to reduce personnel and improve productivity Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 12-18 The Fundamentals of Bank Management (Cont.) • Bank Profitability (Table 12.5) (Cont.) – Security gains/losses • Results from the fact that securities held for investment are shown at historical cost • This may result in a gain or loss when the security is sold – Net Income after Taxes • Net Income less taxes • Return on Assets (ROA)—Net Income after taxes expressed as a percentage of total assets • Return on Equity (ROE)—Net Income after taxes divided by equity capital 7Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 12-19 The Fundamentals of Bank Management (Cont.) • Bank Risk – Leverage Risk • Leverage—Combine debt with equity to purchase assets • Leveraging with debt increases risk because debt requires fixed payments in the future • The more leveraged a bank is, the less its ability to absorb a loss in asset value • Leverage Ratio—Ratio of bank’s equity capital to total assets [10% in 2007] • Regulators in US and other countries impose risk-based capital requirements—riskier the asset, higher the capital requirement Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 12-20 The Fundamentals of Bank Management (Cont.) • Bank Risk (Cont.) – Credit Risk • Possibility that borrower may default • Important for bank to get as much information as possible about borrower—asymmetric information • Charge higher interest or require higher collateral for riskier borrower • Loan charge-offs is a way to measure past risk associated with a bank’s loans • Ratio of non-performing loans (delinquent 30 days or more) to total loans is a forward-looking measure Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 12-21 The Fundamentals of Bank Management (Cont.) • Bank Risk (Cont.) – Interest Rate Risk • Mismatch in maturity of a bank’s assets and liabilities • Traditionally banks have borrowed short and lent long • Profitable if short-term rates are lower than long-term rates • Due to discounting, increasing interest rates will reduce the present value of bank’s assets • Use of floating interest rate to reduce risk • The one-year re-pricing GAP is the simplest and most commonly used measure of interest rate risk • If interest rates rise while a bank has negative GAP, the bank can expect to pay more from its liabilities than it can expect to generate from higher interest rates on its assets 8Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 12-22 The Fundamentals of Bank Management (Cont.) • Bank Risk (Cont.) – Trading Risk • Banks act as dealers in financial instruments such as bonds, foreign currency, and derivatives • At risk of a drop in price of the financial instrument if they need to sell before maturity • Difficult to develop a good measure of trading risk since is it hard to estimate the statistical likelihood of adverse price changes Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 12-23 The Fundamentals of Bank Management (Cont.) • Bank Risk (Cont.) – Liquidity Risk • Possibility that transactions deposits and savings account can be withdrawn at any time • Banks may need additional cash if withdrawals significantly exceed new deposits • Traditionally banks provided liquidity through the holding of liquid assets (cash and government securities) • Historically these holdings were a measure of a bank’s liquidity, but have declined as a percentage of total assets during the past 30 years (41%-1970; 24%-2002) • During past 30 years banks have used miscellaneous liabilities to increase their liquidity Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 12-24 Major Trends in Bank Management • For most of the 20th century banks were insulated from competition from other financial institutions • US banking is in a period of transition due to recent changes in the regulations • The Consolidation Within the Banking Industry – McFadden Act of 1927 • Passed to prevent the formation of a few large, nationwide banking conglomerates • Prohibited banks branching across state lines 9Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 12-25 Major Trends in Bank Management (Cont.) • The Consolidation Within the Banking Industry (Cont.) – McFadden Act of 1927 (Cont.) • Many states also had restrictions that limited or prohibited branching within their state boundaries • Result—many, many small banks protected from competition from larger national banks • Over the years a number of loopholes were exploited to reduce effectiveness of law, primarily bank holding company—Parent corporation that can hold one or more subsidiary banks • Riegle-Neal Interstate Banking and Branching Efficiency Act [1994]—Overturned the McFadden Act Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 12-26 Major Trends in Bank Management (Cont.) • The Consolidation Within the Banking Industry (Cont.) – Economics of Consolidation • Is consolidation of banking industry good or bad? • How large should a bank be – Large enough to offer wide menu of products – Focus on a niche at which they are successful • Despite dramatic decrease in number of banks and banking organizations, number of banking offices (including savings institutions) has remained remarkable stable (Figure 12.1) Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 12-27 FIGURE 12.5 2007 bank charge- offs (in billions). 10 Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 12-28 Major Trends in Bank Management (Cont.) • The Consolidation Within the Banking Industry (Cont.) – Economics of Consolidation (Cont.) • Economies of Scale—Banks become more efficient as they get larger • Economies of Scope—Offering a multitude of products is more efficient [traditional and non-traditional products] • Little empirical evidence to support either types of economies • Possibly merger or expansion provided opportunity to become more efficient—something they should have done prior to the merger Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 12-29 Major Trends in Bank Management (Cont.) • Nontraditional Banking – Traditionally commercial bank accepted demand deposits and made business loans – Under the regulation of the Federal Reserve, bank holding companies provide banks with more regulatory freedom – However, activity is limited to activities closely related to banking Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 12-30 Major Trends in Bank Management (Cont.) • Nontraditional Banking (Cont.) – The Glass-Steagall Act [1933] • Separated commercial banks from investment banking—banks forced to choose • Before 1999, commercial banks could not underwrite corporate debt and equity • Commercial banks challenged restrictions--investment banks were starting to act like commercial banks • Circumventing Glass-Steagall—a number of rulings by Federal Reserve eroded the distinction between commercial and investment banks • The Gramm-Leach-Bliley Act (1999) repealed the Glass-Steagall Act 11 Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 12-31 Globalization • American Banks Abroad – Rapid expansion of US banks into foreign countries • Growth of foreign trade • American multinationals with operations abroad – Edge Act (1919) • Permitted US banks to establish special subsidiaries to facilitate involvement in international financing • Exempt from the McFadden Act’s prohibition against interstate banking Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 12-32 Globalization (Cont.) • Foreign Banks in the United States – Many large and well-known banks in the US are foreign- owned – Organizational forms of foreign banks • Branch—integral part of foreign bank and carries bank’s name, full service • Subsidiary—legally separate with its own charter, full service • Agencies—make loans but cannot accept deposits • Representative Offices—make contact with potential customers of parent corporation Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 12-33 Globalization (Cont.) • Foreign Banks in the United States (Cont.) – Prior to 1978 foreign banks operating in the US were largely unregulated – International Banking Act of 1978 • Foreign banks subject to same federal regulations as domestic banks • Established banks were grandfathered and not subject to the law 12 Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 12-34 Globalization (Cont.) • Eurodollars – Foreign banks were exempt from Regulation Q and could offer higher interest than US banks – Eurodollar deposits made in foreign banks were denominated in US dollars, which eliminated the foreign exchange risk for Americans – American banks opened foreign branches: • Gain access to Eurodollars • Borrow abroad during periods of tight money by the FED – “Shell” branches are created in tax haven countries (Bahamas and Caymans) who have almost zero taxation and no regulation Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 12-35 Globalization (Cont.) • Eurobonds – Corporate and foreign government bonds sold: • Outside borrowing corporation’s home country • Outside country in whose money principal and interest are denominated – Number of tax advantages and relatively little government regulation Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 12-36 Globalization (Cont.) • Domestically Based International Banking Facilities (IBF) – Offers both US and foreign banks comparable conditions as foreign countries to lure offshore banking back to US – IBF is a domestic branch that is regulated by Fed as if it were located overseas. – No reserve or deposit insurance requirements – Essentially bookkeeping operations with no separate office 13 Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 12-37 Globalization (Cont.) • Domestically Based International Banking Facilities (IBF) (Cont.) – Many states exempt income from IBFs from state and local taxes – IBFs are not available to domestic residents, only business that is international in nature with respect to sources and uses of funds – Foreign subsidiaries of US multinationals can use IBFs provided funds to not come from domestic sources and not used for domestic purposes Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 12-38 The Subprime Mortgage Crisis • Banks have significantly increased their exposure to residential mortgages, particularly in the last decade • Much of it involved banks buying securitized mortgages—mortgages pooled into trusts—that became traded securities in the market • Banks and investment banks were also very actively involved in putting these pools together and selling them—often to other banks Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 12-39 The Subprime Mortgage Crisis (Cont) • Earlier in the decade mortgage lending began to shift from low risk mortgages to high risk—subprime mortgages – Borrower has a low credit rating – Lender does not verify borrower's income – Amount of mortgage exceeds 80% of value of home – Often adjustable rate mortgages with “teaser rates” set artificially for the first several years • Banks were happy adding these subprime mortgages to portfolios since rapidly rising real estate prices made these appear safe 14 Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 12-40 The Subprime Mortgage Crisis (Cont) • During the mid-2005s, the rapidly increasing real estate values (bubble) burst – Real estate prices started to decline – Rising interest rates caused adjustable mortgage rates to increase dramatically – The result was a large increase in the default rate on the subprime mortgages • Both banks and investment banks were forced to write- down the value of these subprime mortgages resulting in large losses • The potential collapse of some of the large investment banks required bail-outs Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 12-41 Nonbank Depository Institutions— The Thrifts • Comprised of savings and loan associations, mutual savings banks, and credit unions • Principal source of funds for all three thrifts is consumer deposits • Savings and Loans (S&L’s) – Invest principally in residential mortgages – This industry basically collapsed during the 1980s – Most S&L’s have converted their charters to commercial banks Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 12-42 Nonbank Depository Institutions— The Thrifts (Cont.) • Mutual Savings Banks – Located mostly in the East – Operate like S&L’s, with more power to make consumer loans – This industry suffered same decline as S&L’s • Credit Unions – Basically unaffected by the problems in the 1980s since they did not have mortgages on their balance sheets – Organized around a common group and are generally quite small 15 Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 12-43 TABLE 12.6 Income Statement of Insured Commercial Banks, 1980–2007 (percentage of assets) Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 12-44 TABLE 12.7 Credit Risk Ratios, 1980–2007 (percentage of loans) Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 12-45 FIGURE 12.1 Offices of FDIC-insured institutions (as of year end, 1985–2005). 16 Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 12-46 TABLE 12.8 Size Distribution of Insured Commercial Banks (December 31, 2007) Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 12-47 FIGURE 12.2 Case-Shiller home price index (percent change over prior year). Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 12-48 FIGURE 12.3 Portion of loans and leases that are nonperforming. 17 Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 12-49 FIGURE 12.4 Charge-offs as a percentage of all loans and leases.